IDEAS home Printed from https://ideas.repec.org/p/aah/create/2007-30.html
   My bibliography  Save this paper

Market Power in Power Markets: Evidence from Forward Prices of Electricity

Author

Listed:
  • Bent Jesper Christensen
  • Thomas Elgaard Jensen
  • Rune Mølgaard

    () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract

We examine the forward market for electricity for indications of misuse of market power. The data source is a unique set of OTC price indications posted by Elsam A/S, the dominant producer in Western Denmark, which is one of the price areas under the Nordic power exchange Nord Pool. The Danish Competition Council (the regulatory government agency) has ruled that Elsam used its dominant position to obtain excessive spot prices over the period July 2003 through December 2006. We show that significant forward premia exist during this period, and that they are related both to spot market volatility and misuse of market power in the spot market, indicating that misuse of market power in the forward market accompanied that which took place in the spot market, according to the regulator?s ruling. This is consistent with the hypothesis that Elsam used the forward market to disguise its spot market manipulation. The findings are consistent across forward premium regressions and structural forward pricing models.

Suggested Citation

  • Bent Jesper Christensen & Thomas Elgaard Jensen & Rune Mølgaard, 2007. "Market Power in Power Markets: Evidence from Forward Prices of Electricity," CREATES Research Papers 2007-30, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2007-30
    as

    Download full text from publisher

    File URL: ftp://ftp.econ.au.dk/creates/rp/07/rp07_30.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, June.
    2. Haldrup, Niels & Nielsen, Morten Orregaard, 2006. "A regime switching long memory model for electricity prices," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 349-376.
    3. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    4. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233-233.
    5. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    6. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
    7. Chester Spatt & Bryan Routledge & Duane Seppi, 1998. "The Spark Spread: An equilibrium model of the Cross-Commodity Price Relationships in Electricity," GSIA Working Papers 1999-15, Carnegie Mellon University, Tepper School of Business.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jónsson, Tryggvi & Pinson, Pierre & Madsen, Henrik, 2010. "On the market impact of wind energy forecasts," Energy Economics, Elsevier, vol. 32(2), pages 313-320, March.
    2. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 44(C), pages 178-190.
    3. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.

    More about this item

    Keywords

    Electricity; forward prices; market power; OTC prices;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aah:create:2007-30. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.econ.au.dk/afn/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.